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COST ACCOUNTING

COST ACCOUNTING - MEANING


Cost accounting is concerned with recording, classifying and summarizing costs for determination of costs of products or services, planning, controlling and reducing such costs and furnishing of information to management for decision making.
Cost accounting is a formal system of accounting for costs in the books of account, by mean of which cost of product and services are ascertained and controlled.

COST ACCOUNTING - INTRODUCTION


Accounting for determination and control of costs.

COST ACCOUNTING:

The Institute of Cost and Management

Accountant, England (ICMA) has defined Cost Accounting as the process of accounting for the costs from the point at which expenditure incurred, to the establishment of its ultimate relationship with cost centers and cost units. In its widest sense, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned.

Cost Accounting = Costing + Cost Reporting + Cost Control.

Objectives of Cost Accounting


Ascertainment of cost
Cost control and Cost Reduction: Guide to business policy such as make or buy, introduction of new product etc Determination of selling price

Fixing profit per products.

Characteristics
Cost Recording- posting of the cost transactions Cost Classification- grouping of the cost into a common group like material , labour etc Cost Allocation- allotment of cost to various department Cost Control Cost Reporting- furnishing of data on a regular basis Cost Ascertainment cost of goods

Basic Cost Terminology


Cost sacrificed resource to achieve a specific objective
or the price paid for something Costing simply means the techniques and processes of ascertaining costs. Actual cost a cost that has occurred Budgeted cost a predicted cost Cost object anything of interest for which a cost is desired.

COST CONTROL: Cost control means the control of costs by management. Following are the aspects or stages of cost control.

Cost ascertainment is computation of actual costs incurred Cost estimation is a process of predetermining costs of goods and service. Cost accumulation a collection of cost data in an organized manner. every order and thus helps in ascertaining profit or loss made out on its execution. The management can judge the profitability of each job and decide its future courses of action.

JOB COSTING: It helps in finding out the cost of production of

BATCH COSTING: Batch costing production is done in batches and each batch consists of a number of units, the determination of optimum quantity to constitute an economical batch is all the more important.

Cost Centre
Cost center is a location, person, or item of equipment (or group of these) for which costs may be ascertained and used for the purpose of control It refers to a section of the business to which costs can be charged. Types: Production and Service cost centre

Cost Unit
Cost units are the things, that the business is set up to provide, of which cost is ascertained. Unit of product, service or time in relation to which cost may be ascertained or expressed
Types:
Units of production such as a ream of paper, a tonne of steel, a meter of cable etc. Units of services such as passenger miles, consulting hours, room per day, bed per days

ELEMENTS OF COST
Element of cost

Materials

Labour

Expenses

Direct

Indirect

Direct

Indirect

Direct

Indirect

MATERIAL: The substance from which the

finished product is made is known as material. (a) DIRECT MATERIAL: is one which can be directly or easily identified in the product Eg: Timber in furniture, Cloth in dress, etc.
(b) INDIRECT MATERIAL: one which cannot

be easily identified in the product.

EXAMPLES OF INDIRECT MATERIAL

At factory level lubricants, oil, consumables, etc. At office level Printing & stationery, Brooms, Dusters, etc. At selling & dist. level Packing materials, printing & stationery, etc.

LABOUR:

The human effort required to convert the materials into finished product is called labour.
(a) DIRECT LABOUR: is one which can be conveniently
identified or attributed wholly to a particular job, product or process. Eg:wages paid to carpenter, fees paid to tailor,etc.
(b) INDIRECT LABOUR: is one which cannot be

conveniently identified or attributed wholly to a particular job, product or process.

EXAMPLES OF INDIRECT LABOUR

At factory level foremens salary, works managers salary, gate keepers salary,etc At office level Accountants salary, GMs salary, Managers salary, etc. At selling and dist.level salesmen salaries, Logistics manager salary, etc.

OTHER EXPENSES: are those expenses other

than materials and labour.


DIRECT EXPENSES: are those expenses which

can be directly allocated to particular job, process or product. Eg : Excise duty, royalty, special hire charges,etc.
INDIRECT EXPENSES: are those expenses which

cannot be directly allocated to particular job, process or product.

Examples of other expenses


At factory level factory rent, factory insurance, lighting, etc. At office level office rent, office insurance, office lighting, etc. At sales & dist.level advertising, show room expenses like rent, insurance, etc.